Toyota’s down but far from out

Is this another annus horribilis for Akio Toyoda? As president of Toyota Motor Corporation, he now has to oversee its biggest single recall to date of 7.4 million vehicles because of a faulty window switch. That comes against a backdrop of falling sales in China, where tensions over islands in the East China Sea have crimped the country’s appetite for Japanese cars.

Even so, remember that the litmus test for recall costs goes something like this: is anyone dead or severely injured? Are the parts in question expensive to replace? Is this a labour-intensive exercise?

The answer is no on all counts. As a result, assuming ¥1000 ($12.49) per car for parts and ¥2000 on labour, this round of recalls could cost Toyota a maximum of ¥30 billion, according to Credit Suisse estimates. That is barely 1 per cent of average annual operating costs.

The fallout in China, however, is a bigger problem for Toyota. Its sales there halved from a year earlier in September. This was a steeper decline than for Japanese peers as the car giant is the marque that most symbolises Japan. But then only one-tenth of Toyota’s global unit sales are in China, compared with more than a quarter for Nissan.

The recalls were announced after the market had closed. But investors have already knocked one-tenth off Toyota’s share price over the past few weeks for its travails in China. It now trades at 11 times forward earnings. Granted, this is a big premium to the likes of Nissan and Volkswagen, but well below Toyota’s long-term mean. Moreover, margins at the earnings before interest, tax, depreciation and amortisation level are half those of the past decade, mostly because of the strong yen.

Still, it has limited exposure to Europe and a large presence in the US, where demand has not collapsed. Mr Toyoda will recall worse years before this one.